A study by Whiteoak Capital Mutual Fund for the last 19 years shows that an investor who started an SIP in a mid-cap or small-cap index fund in April 2005 and stuck to the category for 19 years earned higher returns than an investor who changed the SIP annually based on the best-return generating category in the previous year.
An investor, who started with an SIP in a mid-cap fund in April 2005 and subsequently at the start of each financial year switched to the best-performing fund of the previous year across various categories till April 2024 would have earned an annualised return of 15.5% in the period. Now, if she remained invested through SIPs in the midcap index fund only during the period under review, she would have earned 18.1%.
“Investing based on past performance lead to suboptimal returns,” said Vineet Nanda, founder, SIFT Capital. Nanda said investors should do SIPs for a long-term horizon of 5-20 years, as compounding benefits start trickling in only after 7-8 years.
Agencies“These SIPs should be monitored regularly, and they should be changed if there is a problem in the quality of the portfolio or an abrupt change in style of management by the fund house,” he added.Similarly, an investor who started with a small-cap fund and kept switching would have earned a return of 15.1% on an annualised basis. Had she stuck with the SIP in the small-cap index fund, it would have earned 16% per year.Retail investors often tend to chase the best-performing schemes of the recent past. Financial planners say in this process, they tend to chase investment themes that have already run up and often miss out on the best potential returns.For example, an investor, who chased performers, would have started an SIP in a midcap index fund in April 2005, moved to a large- cap fund in April 2007 then to a small-cap fund in April 2010, and again to a large-cap scheme in April 2011.
The study shows from April 2005 to April 2024, SIPs in the large-cap segment, represented by the Nifty 50 TRI, have been the top performers seven times. SIPs in the smallcap, represented by the Nifty Smallcap 250 TRI, and the midcap index, represented by the Nifty Midcap 150TRI, have been top performers six times each.